Saturday, November 15, 2008
The New Deal Made the Great Depression; and What's the Trade Fallacy? Quick!
This will be a post in two parts. First, let's celebrate historian David Beito's great column on LRC today, where he makes a basic point I've been pounding away at. Namely, even if you knew little about economics, if I told you that the worst economic downturn in US history occurred when the government applied the most "stimulus" in US history, what would you conclude? Then if I added that basic economic theory teaches that the "stimulus" efforts would be expected to increase unemployment and delay recovery, what would that do to your confidence in your original answer? And yet, our most recent Nobel laureate concludes from all this that the New Deal spared the US from what would have been an even bigger disaster. Here's Beito's take on this:
I have not verified Beito's claims, but the guy has a PhD in history and blogs at HNN; he doesn't sound obviously crazy or shady. I had no idea that unemployment was so high or that output fell so much in the previous downturn. Beito's right: this is a great case study in the effectiveness of two different approaches. (I am sure Rothbard went over all of this, and that I have just forgotten the numbers relating to the earlier depression.)
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Anyway, I went to Beito's original blog post and was reading the comments. I came across this:
Now in the spirit of this guy's comment, I will refrain from pointing out what I perceive to be its glaring flaw. (First, I could very well be an idiot with a big title, and second, I want to produce my blog posts with the least amount of labor as possible.) Can anyone quickly come up with it? If this guy said the above at a dinner party, would you be able to explain in 30 seconds to everyone's satisfaction why he's a buffoon?
I don’t know for sure that that the old anti-depression policy would have made for a shorter downturn but, then, Krugman doesn't know that the reverse is true. I point to the historical evidence from previous depressions that were fought by using the old anti-depression policy. These were mostly over in two or three years.
If Krugman believes that the decade-long Great Depression was exceptional in nature compared to previous depressions and could only be fought with a new Keynesian approach, he needs to give some evidence for that claim. As far as I can tell, however, he doesn't try. Pending such an attempt, the main burden of proof is on him, not me.
...
It is not ridiculous at all [to compare the 1921-1922 depression with the Great one], that is if the goal is to understand why we had an unprecedented decade long depression. The comparison becomes especially instructive if we limit the analysis to the first year of both downturns. Between 1921 and 1922, there was a significantly faster drop in prices and GDP and a greater rise in unemployment than between 1929 and 1930. From 1921 to 1922, Unemployment advanced from 4 percent to twelve percent, the gross national product fell by a staggering 17 percent. All this was in one year. By contrast, unemployment was still well under 10 percent at the end of 1930.
I have not verified Beito's claims, but the guy has a PhD in history and blogs at HNN; he doesn't sound obviously crazy or shady. I had no idea that unemployment was so high or that output fell so much in the previous downturn. Beito's right: this is a great case study in the effectiveness of two different approaches. (I am sure Rothbard went over all of this, and that I have just forgotten the numbers relating to the earlier depression.)
=============
Anyway, I went to Beito's original blog post and was reading the comments. I came across this:
Basically I am wondering if anyone in the world is actually an economist. Or is everyone a bunch of stupid idiots with big titles and completely no sense. I am not an economist but I do know a few things. 1. To improve an economy you have to be able to produce more with less input. 2. Any policies that help this will help everyone. 3. Any policies that hurt this will hurt everyone. So with that simple definition what do wars do that will increase economic output. Almost nothing...Trade agreements that move jobs from highly automated equipment to highly unskilled labor, ie more workers less equipment is bad for the economy. Why, because you are producing less with more people, dumb (*&^!! So all this stuff we buy from China and Indian and Mexico is a complete bunch of baloney that ruins the economy. So you get really three simple ways to fix the economy in about 2 months. 1. End the war and slash military spending. 2. End any trading with countries who do not have the same minimum wage laws we have. 3. Loan any money to business's who are very likely to become highly automated, ie less people more output.
Now in the spirit of this guy's comment, I will refrain from pointing out what I perceive to be its glaring flaw. (First, I could very well be an idiot with a big title, and second, I want to produce my blog posts with the least amount of labor as possible.) Can anyone quickly come up with it? If this guy said the above at a dinner party, would you be able to explain in 30 seconds to everyone's satisfaction why he's a buffoon?
Comments:
automated equipment? what kind? if everything mechanical > human labor, then why not have lawn mowers cook the dinner at your hypothetical dinner party?
Well, he could say, "We do automate as much as possible--see the fancy oven and microwave? Obviously we have to use some labor, because the best machines haven't been invented yet. But when we ship production to Asia, we are consciously using labor-intensive techniques in lieu of already available, capital-intensive techniques."
I think the partygoers would then turn back to you, not sure who is right.
I think the partygoers would then turn back to you, not sure who is right.
He was okay until he said "trade".
He is 100% right about doing more with less but gets hung up on automation. Automation and foreign trade are both ways to more with less. Buying from abroad, if it's cheaper, means you have more to spend on something else, that 'surplus' allows you to buy home grown goods and services creating jobs too. And the foreign low cost suppliers have to spend their recently earned dollars buying your exports. More home grown jobs. And as these new jobs reflect higher productivity, and the pay they earn has better purchasing power, these are in reality better paying jobs than the old protectionist sinecures to nowhere.
How did that go?
He is 100% right about doing more with less but gets hung up on automation. Automation and foreign trade are both ways to more with less. Buying from abroad, if it's cheaper, means you have more to spend on something else, that 'surplus' allows you to buy home grown goods and services creating jobs too. And the foreign low cost suppliers have to spend their recently earned dollars buying your exports. More home grown jobs. And as these new jobs reflect higher productivity, and the pay they earn has better purchasing power, these are in reality better paying jobs than the old protectionist sinecures to nowhere.
How did that go?
Tim,
Well, I think he is going to say, "I'm not trying to 'create jobs'! Can't you idiots listen? The point is to make more with fewer workers."
BTW guys, I'm not saying your remarks are incorrect, just that I don't think you are quite hitting where he goes wrong even on his own terms.
==
I'll just say what I was thinking of myself, since Tim basically hit it but then veered off. :) If you just look at the US, then importing a bunch of goods produced abroad is even more "efficient" than producing them at home with machines. I.e. at home it takes 1 worker and 10 machines, but if we import it, it takes 0 (American) workers and 0 American machines. Woo hoo! (It's true that you have to ask about how we pay for the import, but this guy didn't ask that.)
And then if you expand and view the whole world as your economy, then obviously shifting the location of a particular branch of production doesn't "take more workers." At any given time, every worker has to be doing something (assuming full employment). The issue is, what will they be doing? Because it is profitable to outsource those particular lines, that means total global production goes up after the rearrangement of tasks. I.e. more total stuff is cranked out with the same global population, i.e. more stuff per worker.
Well, I think he is going to say, "I'm not trying to 'create jobs'! Can't you idiots listen? The point is to make more with fewer workers."
BTW guys, I'm not saying your remarks are incorrect, just that I don't think you are quite hitting where he goes wrong even on his own terms.
==
I'll just say what I was thinking of myself, since Tim basically hit it but then veered off. :) If you just look at the US, then importing a bunch of goods produced abroad is even more "efficient" than producing them at home with machines. I.e. at home it takes 1 worker and 10 machines, but if we import it, it takes 0 (American) workers and 0 American machines. Woo hoo! (It's true that you have to ask about how we pay for the import, but this guy didn't ask that.)
And then if you expand and view the whole world as your economy, then obviously shifting the location of a particular branch of production doesn't "take more workers." At any given time, every worker has to be doing something (assuming full employment). The issue is, what will they be doing? Because it is profitable to outsource those particular lines, that means total global production goes up after the rearrangement of tasks. I.e. more total stuff is cranked out with the same global population, i.e. more stuff per worker.
Dr. Murphy,
Like the commenter, I am also not an economist, but I would note that not every stupid idiot has a big title; some of us have no title at all.
Regarding the stated conditions for an improved economy, First, I would want to clarify that by economy we are discussing is the US economy.
Second, the first premise of this argument is insufficient. What an economy produces is as important as how much it produces. If Ford managed to produce many more Pintos with less manpower (assuming that you could magically do away with union agreements) they still would not be able to sell many more, since their competition would continue to produce superior products. The market will tell Ford (and indeed it has told Ford) not to produce Pintos, no matter how automated or cheap the process.
Third, I might note that less people with jobs is not necessarily a good thing for an economy, even one that produces goods in a completely automated fashion. Somebody still has to purchase the goods produced. Unless we are advocating automated production and expansive exporting, those people will need jobs to produce the revenue with which to make purchases. Taken to its conclusion, the ultimate economy under this scenario is one in which all production is automated and then exported. That leaves few jobs in the US and few products to purchase in the US. We would then really need to import cheap foreign goods, which is contrary to part of the argument.
Forth, I would observe that two months is a very short time to turn around an economy as large as the US.
Fifth, I would point out that minimum wage laws are part of the problem and are counterproductive in any attempt to repair the economy. That will probably start an emotional argument with most everybody within earshot – but it is an argument I am willing to make.
Sixth, I would also like clarification as to who will be making the loans to any business that meets the conditions of the argument. If we are speaking about banks, proper risk assessment afforded by the profit motive should be sufficient to allocate funds to the most productive uses, which again are not necessarily the ones that build the most things with the least amount of labor. If the government is doing the lending (which seems increasingly to be the assumption) then the argument becomes a recounting of the reasons why free markets allocate scarce resources more efficiently than centralized planning.
This is all I can think of now. What do you think?
Regards,
Nick Curcio
Post a Comment
Like the commenter, I am also not an economist, but I would note that not every stupid idiot has a big title; some of us have no title at all.
Regarding the stated conditions for an improved economy, First, I would want to clarify that by economy we are discussing is the US economy.
Second, the first premise of this argument is insufficient. What an economy produces is as important as how much it produces. If Ford managed to produce many more Pintos with less manpower (assuming that you could magically do away with union agreements) they still would not be able to sell many more, since their competition would continue to produce superior products. The market will tell Ford (and indeed it has told Ford) not to produce Pintos, no matter how automated or cheap the process.
Third, I might note that less people with jobs is not necessarily a good thing for an economy, even one that produces goods in a completely automated fashion. Somebody still has to purchase the goods produced. Unless we are advocating automated production and expansive exporting, those people will need jobs to produce the revenue with which to make purchases. Taken to its conclusion, the ultimate economy under this scenario is one in which all production is automated and then exported. That leaves few jobs in the US and few products to purchase in the US. We would then really need to import cheap foreign goods, which is contrary to part of the argument.
Forth, I would observe that two months is a very short time to turn around an economy as large as the US.
Fifth, I would point out that minimum wage laws are part of the problem and are counterproductive in any attempt to repair the economy. That will probably start an emotional argument with most everybody within earshot – but it is an argument I am willing to make.
Sixth, I would also like clarification as to who will be making the loans to any business that meets the conditions of the argument. If we are speaking about banks, proper risk assessment afforded by the profit motive should be sufficient to allocate funds to the most productive uses, which again are not necessarily the ones that build the most things with the least amount of labor. If the government is doing the lending (which seems increasingly to be the assumption) then the argument becomes a recounting of the reasons why free markets allocate scarce resources more efficiently than centralized planning.
This is all I can think of now. What do you think?
Regards,
Nick Curcio
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: November 17, 2008 at 11:42 AM
: November 17, 2008 at 11:42 AM Subscribe to Post Comments [Atom]
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